Business Plan Versus Business ModelsWhere did the idea that startups write business plans come from? A business plan is the execution document that large companies write when planning product-line extensions where customer, market and product features are known. The plan describes the execution strategy for addressing these “knowns.” In the early days of venture capital, investors and entrepreneurs were familiar with the format of business plans from large company and adopted it for startups. Without much thought it has been used ever since.

It turns out that’s a mistake. A startup is not executing a series of knowns. Most startups are facing unknown customer needs, an unknown product feature set and is an organization formed to search for a repeatable and scalable business model. That means that writing a static business plan adds no value to starting a company, as the plan does not represent the iterative nature of the search for the model. A simple way to think about it is that in a startup no business plan survives first contact with customers.

Business models are dynamic and reflect the iterative reality that startups face. Business models allow agile and opportunistic founders to keep score of the Pivots in their search for a repeatable business model.

Business Plan Competitions are Great for Schools and Bad For StudentsAlmost every university, region and car wash now has a business plan competition; the rules, who can participate, how large the prizes and who are the judges vary by school.

Business plan competitions perpetuate everything that is wrong about trying to make plans that were designed to be used in large companies fit startups. (One of my favorites: “Judging will include such factors as: Market opportunity, reward to risk, strategy, implementation plan, financing plan, etc.”) All of which may be true in large companies. But little of it is relevant to the chaos and uncertainty in the life of a startup.

Yet an ever increasing number of schools keep holding Business Plan competitions. Why?

They’re a match for the “How to write a business plan” classes that are offered.

It makes the school appear relevant to their constituencies; students, donors, faculty, VC’s.

Business plans are easy to grade, score and judge.

Schools can get Venture Firms to fund prizes for the best business plan.

Venture Firms use the contests as another source of deal flow and talent.

There is no alternative.

The irony is that business plan competitions ought to be held for plans from large companies not for startups.

The Alternative – Business Model CompetitionsI’ll offer that to be useful for startups Business Plan competitions need to turn into Business Model competitions. A Business Model competition has a radically different goal than writing a business plan. The Business Model competition measures how well students learn how to Pivot by getting outside the building (not by writing a plan inside one.)

Each team would be judged by their business model presentation on these five steps.

What did you initially think your initial business model was? (initial business model hypotheses)

What did you build/do? (built first product, talked to users, etc.)

What did you learn outside the building? (parts of our feature set/business model were wrong)

Then what did you do? (iterated product, changed business model, etc.)

Repeat steps 1-4

The business model would be scored and judged based on steps 3 and 4. And extra credit for multiple times through the loop.

For the first time we’d have a competition that closely resembled the reality that founders face, rather than a creative writing exercise.

46 Responses

Are you a fan of “Business Model Generation”? I imagine that modeling approach could be a second step that follows an executive summary (a necessary doc for funding conversations). It’s about the interplay of the elements of a business, and it is also suitable for next step analysis.

My ideal competitions:
(1) Executive Summary
(2) Business Modeling
(3) Business model environmental analysis
(4) …maybe still a business plan because investors like to see a body of research

Steve I had the doubt about something wrong about BPCs…the main indicator was that i know many competitors that never become a brilliant start up ( or even a start up!).
I would be happy to apply in Italy your PA4E!

I was actually going to try to do a pseudo-track in Customer Development, Lean Startups, and so on as a student-directed activity when I attend Ross/Michigan next year. (The West’s expert on Lean Manufacturing is at Michigan.)

Great post. I was a lead organizer of a large, nationwide business plan competition (mitcep.org) in 2009; we’re always trying to improve and we’re delighted whenever we can learn from thoughtful customer feedback.

I’ll note that MIT’s competitions are also split into 2 phases; an initial vetting and finals 2 months later. The 2 month period is all about speaking to people in industry (incl. through assigned mentors) and potential customers – whether you call the result of that a business “plan” or a “process” is semantics.

I do think you’re somewhat missing the point of what these competitions are doing. They are taking students who’ve never before considered themselves entrepreneurs (and who’ve gotten to where they are largely by getting A’s in classes or being consultants, from the business side, or by being amazing technical people in engineering labs) and encouraging them to become a part of the startup world, by forming interdisciplinary teams, attacking a market need, and pitching to investors. At the end of the competition, the winner is not the team that gets the cash (although I’m sure it doesn’t hurt their egos) but every student who participated and pushed themselves to learn about startups and themselves. A lot of future succesful entrepreneurs don’t need that introduction because of where and who they grew up with, but that doesn’t mean we shouldn’t have these on-ramps to entrepreneurship out there for everyone else.

In terms of follow-on investments, companies that have participated in the MIT Clean Energy Prize do have raised tens of millions of dollars, which isnt’ bad either – story from the Boston Globe: http://bit.ly/9AemTe

Actually, I think your post confirms the point Steve is trying to make. You take a group of people who have gotten to where they are by getting better grades than their compatriots and put them in yet another situation where success is defined by grading. I personally believe that measuring success by who has the best pitch is the wrong approach (as is defining longer-term success by follow-on investments.) These only demonstrate proficiency at raising money, not creating a sustainable business, and IMHO teach entrepreneurs the wrong lessons.

I think, however, without putting evaluating stages 1 through 3…judges will sneak evaluations of 1 through 3 into 3 and 4 by even well meaning judges. (the internal process of ….”shouldn’t they get some credit for….” or just the overall draw of unique ideas).

Certainly, the business model competition’s “brand”/uniqueness/story is probably best preserved by your description of the model.

Is there some place for rewarding both the process and result? Perhaps focusing on 3 and 4 does that….I’m not honestly sure.

Often I agree with Steve on his approach to businesses, but I find the vehemence with which he attacks business plans and these competitions somewhat unwarranted and disagree with some of his conclusions.
Let me state at the outset that I agree with him that an entrepreneur’s ability to change course (“pivot”) based on changing circumstances and information is probably the most important action he will take. Doing so, rather than being married to a static business plan, is vital to the success of any start-up venture.
Why then do I disagree with this post? Because the process of creating a business plan is fundamentally important. As a consultant who works with entrepreneurs (frequently pre-revenue), some of the biggest mistakes I have seen stem from 1) lack of knowledge about the market, 2) lack of any business strategy, 3) focus on following through on a product idea without validation of a need for the product, or 4) no idea how to commercialize the product. Each of these problems can (and should) be solved by the process of creating a business plan.
I agree with Steve’s assessment that far too often founders become “married” to their business plan, refusing to make the changes necessary because it is not in the plan, but that is a problem with how business plans are used, not a problem intrinsic to the plan.
A good business plan should be constantly updated. It should reflect management’s thinking at the present and include all new developments and understandings. It should include all those changes in course (pivots) that the entrepreneur has made and understand that more will have to be made in the future. Rightly, Steve addresses the importance of a business model, but the model should be a part of any good plan (and I will be the first to admit that many, poorly created plans, lack one), but I believe dismissing business plans and business plan competitions outright is throwing the baby out with the bath water.

I have to agree with you on what I’ll call the fallacy of the business plan.

I was brought into a startup less than a year in to save it from itself. The company was hampered by the bible it called its business plan. After ditching the business plan, we developed into a liquid organization, able to move with the markets.

We eventually did develop into three distinct divisions each with a business plan, but only after we broke 10% profits yearly, in the seven digits, with solid cash flows and no debt.

10 years later I left and entered an MBA program, filled with “kids” who have never had a job outside of an internship. Have never seen the 20 hour days of a startup. Have never wondered if they were going to be paid that QUARTER (and if they would have to push more of their own cash into the business…now THAT is being an entrepreneur! SKIN IN THE GAME!!!). And they are all chomping at the words of the so called skilled professors, who themselves have never lived outside of the walls of yesterdays mega-corps. This includes believing every word uttered about business plans, regression analysis, marketing blitzes.

It’s time we move out of the 50’s blue suit mentality and into a new era of light, lean, fluid business beliefs including iterative business development for startups.

Cheers to you for your ideas of a new way of doing business that matches our current environment!

I was a business major and participated in said Business Plan competitions.
First time I learned about the concept of “Business Model” vs “Business Plan” I saw how much better the idea of a Business Model fits my Startup.
About the Business Model competition… It would have never worked for me.
I just had the first major pivoting and I would have never, seen this coming without seeing my “Business Plan” fail in the real world.
The only way to learn the importance of pivoting is by actually loosing money every day you don’t.
I guess it is a little like Poker. Extremely boring game, but in the moment you play for money you discover a new side about yourself.

I understand the point you’re trying to make but I feel it’s software-centric.

I’ve run a University business creation competition and the best teams are those that *do* get outside the building and begin talking to potential customers.

If a team has an idea about a biotech advancement or something that’s just come out of the Physics lab it will likely require a significant amount of money up front due to equipment/R&D costs. In that scenario, a document that has information on the customer pain, likely market segments, finances etc will help a fledgling team organise their thoughts and research the things that matter before committing resources (as well as communicating that information succinctly). During this process they may realise that they have to pivot and solve a different problem. Whether the document they produce is text, powerpoint slides or something else is not important but the learning it contains is. However, for software startups I can see that the initial costs are lower so it’s easier to pivot as you get early feedback rather than spending time on documenting the learning.

I used to run Cambridge University Entrepreneurs and we run a Business Creation Competition*. Our Tech stream is modelled on how many tech business get going (i.e research, write a plan, pitch etc) but our software stream is modelled on getting a demo out (i.e write a demo, get users). Talking to potential customers is common to both streams.

Overall, I believe business plans have their place, even for startups.

Amir

* Please note that I called it ‘Business Creation’ not ‘Business Plan’. Some of our teams even drop out part way though because things take off. That actually happened this year and one team has withdrawn from our Software competition, is raising a seed round and considering a move to the valley.

We have been fighting for our rights, and trying to explain that the local businespaln competition makes no sens for startups, now we got the courage to go and launch our own Business Model Competition next Autumn!

I don’t believe in writing business plans either – but the business plan competitions I’ve been to had nothing to do with the old 20 page paper document with lots of excel graphs that we normally think of.

They were just presentations pitching to potential investors. So in that sense the words mean totally separate things.

A number of commenter’s were concerned that by building a business model versus business plan founders would miss analyzing competition, market size, putting together a detailed financial plan and wouldn’t understand customer needs and pain.

I’m not advocating skipping any of these things.

What I am advocating is to stop the detailed analysis of each of those elements as if putting them on paper or PowerPoint makes them true – and instead:
1) assume they are untested hypotheses
2) get out of the building and test those assumptions
3) keep track of what you learned and which parts you changed

Another theme in the comments is that while this type of learning out of the building may be possible for Web 2.0 startups it can’t be done for hardware or medical devices.

That’s simply not true. It confuses the difficulty of iterating the physical product with all the additional learning that can be done outside the building for any type of product. The reality is that this process works for all startups that have customer and market risk. Biotech is the only place where I wouldn’t advocate its use.

Finally, there’s no need to get rid of the excitement of the competition, the prizes or the connections with VC’s. I’m not advocating stopping the contests, just changing its format to better match the real world.

Does anyone really look at a business plan and assume that any of the assumptions will hold 100% true? It seems to me as if we are all familiar with with the uncertainty surrounding startups – and no one wouldn’t expect a true entrepreneur to be getting of the building and testing the assumptions.

I think the real disconnect lies in that BPC’s pull from an academic setting – meaning they often include those that are not really entrepreneurs, but are students performing an academic exercise. Real entrepreneurs are few and far between, but I bet even in the most regimented BPC the true entrepreneurial students are out testing their hypotheses and adjusting their model as need be, or pivoting as you would say.

A business plan is a road map showing how an entrepreneur is going to start and run his or her business. The benefits far outweigh the time it takes to write the plan because it gives the entrepreneur the ability to develop assumptions, consider alternatives before committing resources. It’s a sales tool for attracting investors and partners.

At its core a business plan is a description of the company and how to launch, run and grow it. Like any other journey things go a lot more smoothly if you prepare and bring a map. Of course, if an opportunity or challenge presents itself a good entrepreneur will veer off course and recalibrate.

While not every turn in the road needs to be mapped, smart business owners know the direction they’re going, the obstacles that may crop up — obstacles always crop up! — and what they’ll need to reach their goal.

Check out the founder of Twitter Jack Dorsey 3 keys to Twitter’s success. There was no business plan.

Jack Dorsey outlines three core takeaways from his experiences building and launching Twitter – and more recently – Square, a simple payment utility.

1) Draw: get your idea out of your head and share it,
2) Luck: assess when the time (and the market) is right to execute your idea,
3) Iterate: take in the feedback, be a rigorous editor, and refine your idea.

Steve, love the blog but have to agree with Amir and Michael that this is an unnecessarily harsh criticism of bplan competitions.

But maybe we’re just getting caught up on semantics here…for example, about two weeks ago I was a judge at one of the largest “business plan competitions” in the world, and I can accurately state that it was anything *but* a document-focused bake off…these were real startups that had built some amazing businesses.

Each of the 40 companies that presented was pursuing a really big idea; to make it to this particular competition, they had to win a previous bplan competition (e.g. regional feeder events); and, I would say 90% had some very meaningful and tangible customer traction (in other words, there was a high correlation between customer traction and bplan competition results).

In fact, many of the startups had strong elements of your Customer Development process, though I doubt many were familiar with the term…there was simply an awareness amongst the teams that presenting external evidence (sales, partnership deals, etc.) gave them a serious leg up when presenting their pitch.

Another notable benefit is that bplan competitions give the teams– often made up of younger entrepreneurs– practice in handling hard Q&A under fire with poise, which was evident in spades. And, they provide a relatively “safe” venue to hone the pitch. After all, pitching is a cornerstone skill for sales, marketing, fundraising, partnerships, exit, etc.

(Having said all the above, after 25+ years, the competition referenced above is changing its name from Moot Corp to Venture Labs Global Investment Competition, partly to reflect the fact that it is no longer a “business plan competition”…so perhaps this really IS evidence of your thesis?)

I couldn’t agree more! A business plan is – as the term states – a planning document. What start-ups need to focus on is the business model and not the planning document, since the model will change several times until the right one is found.

Your post reminds me of a discussion that Alan Smith (designer of “Business Model Generation”) and I recently had on a long working walk in the Swiss Alps. We considered writing a manifesto for start-ups. One major point was that “business plans are dead” – at least as a “technique” to figure out how to succeed…

The key to success for entrepreneurs is the ability to rapidly adapt the business model to a customer jobs-to-get done… and for that you need business model prototyping & testing and not business plan writing…

Most founders/entrepreneurs are driven by passion and the end-dream and are thus unable to relate to external stakeholders who, naturally, are not similarly driven. The “business plan” serves the useful role of compelling the entrepreneur to temporarily exit this “all-heart” mode and compose thoughts in a cool, dispassionate, nearly mechanic way. The benefit of such a process is that it then leads to a common vocabulary with external stakeholders and allow conversations to be mutually less tormenting and frustrating. Entrepreneurs hate it, but sadly the world is not made up only of entrepreneurs and influence isnt necessarily distributed in their favour either.

Not only are business plans a “port” of strategic planning from a large firm to a small firm setting but the existing critiques of strategic planning in a large firm setting reveal what a bad fit BPs are for the startup setting. Many people criticize strategic planning because it is difficult to plan for the future, unknowns and change or to adpat the strategic plan once change does happen. In a startup these problems are multiplied 10-fold which makes strategic plans (or as they are called in an entrepreneurial setting–business plans) almost totally irrelevant.

For those who feel business plans have some merit, I think the heart of what they appreciate is really the essence of lean startup / customer development / Durant School of Entrepreneurship: validating assumptions with customers, understanding their buying process, etc. Clearly that part of the process is right but I don’t think that BPs or BP competitions deserve the credit or should be protected for that reason.

Wow, great post, well said, even though I disagree there are points here worth making.

I’m with Nathan, I really like the business plan competitions, I judge several, and I think you’re putting up a straw man here by equating business plans misused with business planning. It’s sort of like saying regular exercise is bad because some people try to do a marathon without training.

The major business plan competitions give mostly real businesses an opportunity to pitch to investors/judges and get real feedback. As Nathan and others suggest, it’s about the pitch, and ultimately, about the business, not just the plan document.

I posted recently about my favorite moment at the recent Moot Corp, when the entrepreneurs put up projected numbers and the judges noted it didn’t match their plan. “Sure, that was several iterations ago,” they answered. the point being that in the real world the planning process, well used, is pretty much the same as what you’re calling modeling. It’s changing quickly, reflecting new developments all the time.

The contests you describe are pretty much in the past now. In recent years they’ve evolved from an academic exercise to mostly real businesses doing mostly real pitches for mostly real investors.

And what you probably don’t see, unless you’re a judge (like I am, and Nathan is), is the back side of these contests, when the entrepreneurs get time alone with their investor/judges for real discussion about their pitch, their business, and what they might do next.

And I do agree completely with your underlying point, which is that business planning is management, steering, reviewing and revising, never a static document. My favorite quote is Dwight Eisenhower’s: “The plan is useless; but planning is essential.”

We are going to launch the first business model competition. At this point the intent is for it to be a national competiton, the Moot Corp of business model competitions (open to all, especially readers of Steve’s blog). If there are any thoughts about what to call the competition, how to organize it, and how to promote it, I would love thoughts and feedback from the community. Feel free to reach out to me directly at nfurr@byu.edu or at http://www.nathanfurr.com

Maybe the exception proves the rule but I’m sure IBM’s Sandy Carter and Phaedra Boinodiris would disagree. Phaedra won a case competition getting her MBA at UNC that lead to the development of Innov8 and the Serious Gaming division within IBM. For more on this story, see Gaming is Serious Business (even at IBM) | Fast Company http://bit.ly/bR6LD6

[…] by davidcummings on May 23, 2010 The startup process: there is none. Much like the debate around business plan competitions being bad (too much making up stuff) and a potential solution being business model competitions, startups […]

I couldn’t agree with you more Steve! I’m a Director at Startup Weekend, and we are currently launching a new brand “Startup Weekend University” to quell the overwhelming demand for an alternative to Biz plan competitions. We can model entrepreneurship as a means of educating students and founders while focusing on tangible results without having to focus on non-productive, static, and misaligned plans.

I’m really intrigued by this post. While our existing business, Granada Advisors, focuses on finance and strategy work for SME clients, we are in the process of launching a digital consultancy called Crux & Gage. One of the services we will provide in this new business is “rapid prototyping” of digital deployments, including websites, web apps, mobile apps, etc. I have to believe there is an analog to this “rapid prototyping” / wire-framing approach when it comes to startup business models. I’m going to be noodling on this for a while; there are still aspects of what you would do in a business plan that you would want to create for a business model, however to rapidly prototype such a model you would want to strip it down to its bare essentials. I would imagine that what you DON’T Do in such a situation would be nearly important, if not more so, than what you DO Do.

Thanks Steve, As a business school survivor I resonate with this on a deep level. I love my alma mater but believe that business education is something of an oxymoron. Rather than go to school I think it far more effective to learn by either starting a business yourself or apprenticing yourself to smart people you respect and actually engaging with a market rather than sitting around theorizing about it.

Of all my experiences, I think that the MIT 100K successfully baked the right incentives built in- namely, the encouragement to pivot- by de-emphasizing the business plan as a final beautiful product to be untouched and followed, but rather a series of mini competitions where pivoting and user testing worked in your favor. Maybe it’s a step towards what you are envisioning? I do believe business competitions have their place in the world as a motivator, discipliner, and network expander for new entrepreneurs.

[…] to question the value of “MBA business plans”. Silicon Valley legend, Steve Blank*, is not a fan of business plan competitions, which are fairly analogous to the EP. I can see his point – with many startups, you’d […]